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Sales of new homes fell 1.6% to an annual pace of 915,000 last month, the Commerce Department said.

The decline follows April's unexpected surge of 16%, which was revised lower to 13%, though that remains the largest increase since September 1993.

The median price of a new home fell 0.9 percent to $236,100 last month from $238,200 a year earlier.

Inventories declined, but the decline was less than sales, pushing the supply of homes at the current sales rate to 7.1 months from 7 months in April.

Although new home sales account for just 15% or so of the total home sales (existing homes make up the rest) conventional economics wisdom is that purchases of new homes are considered a timely snapshot of market demand since they are recorded when the contract is signed, while existing home sales consist primarily of closings that may reflect contracts signed weeks or months in advance.

The catch, however, are contract cancellations, which leads us to today's Number Two.

2. Lennar

This morning Miami-based Lennar (LEN) reported a second-quarter loss of $244.2 million. Can you believe that as recently as last July the company actually reported a net profit of $324.7 million?

By just about any measure the results were worse than expected.

The company reported a 28% drop in home deliveries year-over-year.

Consequently, revenue fell 37%, the most in at least 10 years, Bloomberg said.

New orders in the quarter declined 31%.

The average sales price of homes fell more than 7% year over year.

The cancellation rate came in at 29% - among the reasons new home sales figures (see Number One, above) are so deceiving.

It is quite disturbing that Lennar has made absolutely no progress on the company's cancellation rate this quarter.

Back on April 7 the company reported a first quarter cancellation rate of, again, 29%.

In April's 10-Q filing, the company said:"Although our cancellation rate in the first quarter of 2007 increased compared to the first quarter of 2006, we focused significant efforts on reselling the homes that were the subject of canceled contracts, which, in many instances, included the use of higher sales incentives (discussed below as a percentage of revenues from home sales), to avoid the build up of excess inventory."

And what about those sales incentives?

The company reported higher sales incentives offered to homebuyers of 9.6% in the first quarter of 2007, compared to 4.9% in 2006.

In this quarter the company reported sales incentives surged to $43,700 per home delivered, compared to "just" $24,700 per home delivered a year ago.

So two things: cancellation rates are not making progress, and the company is resorting to a stunning increase in incentives.

The company is even as we write this on a conference call, saying, among other things: - The market has "eroded" over the past six months- The subprime market needs to be "replaced"- The company is facing a "great deal of downward pricing pressure."

3. Case-Shiller Index: "No Region is Immune"

The mantra being pushed by those "in the know" in the real estate industry - by which we mean "those with real estate-related things for sale" - is that the overhang of excessive inventories, bloated prices, weakening demand and tightening credit standards is an isolated "regional" issue. So we were surprised to see the Case-Shiller Home Price Index show that 14 of the 20 cities tracked saw year-over-year declines in home prices.

Home values declined 2.1% in April year-over-year, according to the S&P/Case-Shiller report released this morning.

That was the fourth straight decline in the group's nearly six-year-old index.

"No region is immune to the weakening price returns,'' Robert Shiller, chief economist at MacroMarkets and Yale University professor, said in a statement.

Meanwhile, over in the land of for-profit companies not explicitly backed by the full faith and credit of the U.S. government yet based on their size and role in U.S. credit markets... backed by the full faith and credit of the U.S. government, Freddie Mac (FRE) Treasurer Timothy Bitsberger said the subprime mortgage problems are "very well defined'' and largely confined to a small percentage of borrowers in seven states, according to a Bloomberg story.

Bill Gross, manager of the world's biggest bond fund, the $103 billion flagship PIMCO Total Return Fund, said holders of some investment-grade portions of collateralized debt obligations backed by subprime mortgages will lose all of their money, before revealing a disconcerting level of sophisticated and wide ranging knowledge about the workings of high class call girls and prostitution in his monthly commentary released today.

"AAA? You were wooed Mr. Moody's and Mr. Poor's by the makeup, those six-inch hooker heels and a `tramp stamp," Gross said in his monthly commentary posted on Pimco's Web site today. "Many of these good looking girls are not high-class assets worth 100 cents on the dollar," Gross added.

Briefly turning his attention away from the relative value and worth of hookers, Gross said the willingness to extend credit in other areas such as high yield, bank loans and even certain segments of the AAA asset-backed commercial paper market "should feel the cooling Arctic winds of a liquidity constriction."

"Our prim remembrance of Gidget going to Hawaii and hanging out with the beach boys seems to have been replaced in this case with an image of Heidi Fleiss setting up a floating brothel in Beverly Hills," he said, before adding, "Did I say that out loud?"

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